Guide to Financial Freedom (I)

For many people it is as if there were a neon light flashing in front of their eyes, a light that identifies their ideal goal in life.
Financial Freedom!
Yes, financial freedom. And for most it means freedom from work with all the money they need to live the life they want. But do they have a money freedom plan? Do they know how they expect to achieve financial independence?

The Financial Freedom Dream

Many people do seem to dream about a day when they can retire from work and begin doing anything they want. They fantasize about a time when they would have no bills to pay, a ton of money in the bank, and be able to travel the world eating in the best restaurants, staying in the fanciest resorts, and seeing the world's most beautiful sites.
Who wouldn’t want to be free from money worries? There is an old saying that money can't buy happiness. Perhaps so, but no matter how true that is, it is equally obvious that all else being equal having money can eliminate a lot of problems and make life a lot easier.
Note:
Money can’t buy happiness, but all else being equal having money can eliminate a lot of problems and make life a lot easier.
And who could deny that giving up an unpleasant job to take up golf, working on Habitat for Humanity houses, or traveling wouldn’t be pleasant? Not me. And I’ll bet not you either.
Every day Americans spend a fortune on lottery tickets. Most of these people think that if they just had enough money all their problems would be solved (at least the financial ones) and they could live a life of ease. Of course that rarely happens, even if they win millions.

An Inside Secret About Financial Independence

Now I am going to give you one of the greatest secrets to success with money and to finding happiness in life generally: you have a potential to experience financial freedom and to do so much sooner than you think.
The key to financial freedom is to discover that achieving this independence is internal more than external and in arranging the financial affairs of your life so that neither the lack of sufficient money nor the involvement in managing a lot of it restricts your potential to live a full and happy life.
The truth about financial freedom can be found in the fifth law of money.

Financial independence is not generated by temporary levels of wealth or income but by setting correct priorities, exercising self-discipline in financial decisions, living debt free, effectively managing resources, and claiming it as a personal emotional and mental attitude

When you do these things well you will soon find yourself with plenty of money in the bank, but more important you will discover that the freedom people seek can be realized easier than ever dreamed.
Financial independence is not dependent upon the particular amount of money in your possession or your income as much as it is in being free from the limitations that people experience because of their financial entanglements.
It is not being able to buy the most expensive car or home in the world as much as it is realizing that most of the things you really want to do don’t cost much, if anything, and that most people can easily afford to do everything they really want to do—once they get in control of their money and follow the approach recommended in this article.
Achieving financial freedom does mean having a clear, set amount of money in the bank or reliable passive income. But it may not take as much as most people think when they manage their affairs correctly.

1st Key to Financial Freedom:
Correct Priorities

Let’s look at these keys one at a time. The first is setting correct priorities. Your financial future begins with the priorities you choose to set for yourself. There are many of these choices but the most important one is this. It is more important for you to choose to save than it is to choose to spend. Unfortunately most Americans choose spending over saving.
In the USA credit card debt tripled in less than two decades, from $238 billion in 1989 to a whopping $800 billion in 2005. Shopping is often described as a hobby rather than a necessity. (Fortunately the current economic crisis has jolted many back to reality, hopefully for good.)
And cost has been no inhibitor. Even with the soaring cost of gasoline, until recently Americans showed little interest in curtailing their driving even though their overspending was enormous.
Note:
Your financial future begins with the priorities you choose to set for yourself. The most important one is this: it is more important for you to save than it is to spend.
At the same time saving money, for many, has become non-existent. Incredibly for the first time since the great depression over seventy years ago the American savings rate recently became a negative number! (It now shows some sign of improving in the face of long term economic difficulties.)
Financial independence requires setting savings as a top priority, with a ten percent rate suggested as the norm. Without saving money financial success is impossible; with it, success is almost inevitable.
What are your financial priorities? Are they good ones? If financial independence is high on your list you will choose financial priorities that support that goal. As noted, one of the first is to choose saving money over overspending. Then you can learn to make other better choices as well and you will succeed.

2nd Key to Financial Freedom:
Self-discipline

Exercising self-discipline in financial decisions is the second step toward financial independence. Many people have heard about delayed gratification but not nearly so many have learned to practice it! Achieving financial independence absolutely requires us to stop spending money unnecessarily and impulsively. It must be spent purposely and by plan.
Almost every retail store is organized around the fact that most of us are undisciplined spenders. If we go to the grocery store the milk and bread are at the back while the cookies, cakes and candy bars are up near the checkout counters. They know we will buy on impulse all the stuff we don’t plan to buy in advance. If we see it we will buy it.
Note:
Many people have heard about delayed gratification but not nearly so many have learned to practice it! Achieving financial independence absolutely requires us to stop spending money unnecessarily and impulsively.
Several years ago I decided to curtail my own impulse buying. It wasn’t easy but I think it has been one of the best financial moves I have ever made. I started a new practice. If I wanted something I saw I just put it on a list to think about and buy later. (I still do this although most often my list is an Amazon wish list.)
For a few weeks if I caught myself having purchased something impulsively I returned it to the store even if I knew I would later buy it purposefully. In short order I had developed a new habit, really a whole new mind set, that has had a significant impact on my personal finances.
Now I almost never buy anything at first glance. Instead of saying, “That looks interesting; I think I’ll get it,” I think “That looks interesting; I’ll think about getting one.” It is my habitual way of shopping.
There are numerous benefits to this discipline.
  1. A lot of things will soon just be dropped from your list. Not all impulses reflect real needs or desires.
  2. Buying later gives an opportunity to do a little research and buy more intelligently.
  3. There are often alternative products or sources that can offer better prices or values.
  4. You will feel a lot more in control of your spending when it is intensional rather than impulsive.
  5. You will avoid a lot of stupid mistakes with your money.
Remember, people selling to your impulses are specifically targeting your tendency to buy things you would not buy otherwise simply because they are in front of you. Now I often find things on my wish list and wonder why I ever even considered them worthwhile.

3rd Key to Financial Freedom:
Living Debt Free

The next essential for financial independence is one I suspect you may have been anticipating, living debt free. This is believed by many to be an impossible dream and by many others to be laudable but impractical. It is neither. It is totally practical.
My parents lived on a rather average income, a somewhat low one really. But they managed relatively well. They were able to buy new cars (an expense I don’t recommend) and after my father died my mother was able to trade their lake home for a brand new home in town. But they never borrowed money for anything. Never. Not even for their home!
Many, actually most, people believe that they cannot have anything much without assuming debt. This is simply not true.
Note:
People without debt get to save or invest a lot of money and still spend more than others every month. Once that fact gets firmly implanted in our minds our financial thinking will never be the same again.
People without debt get to save or invest a lot of money and still spend more than others every month. Once that fact gets firmly implanted in our minds our financial thinking will never be the same again.
Buying a home may be an exception, at least in some cases, but even here the maximum period of payoff should ordinarily be fifteen years (monthly payments are not much larger than for thirty year notes) and then that payoff should be accelerated as much as possible.
If you think this is silly get out your home loan papers and look at the amortization schedule. How much are you paying on your house. Not the total house payment, now. Look at the principal payment! Not much is it.
All that money you pay every month is not for your house but for the privilege of financing it over an extraordinary period of time. Making an extra payment on your loan equal to that principal (probably much less than you think) will knock off a whole month’s payment at the end. Remarkable. There are two other possible exceptions where loans may be acceptable, medical bills and education costs.
The real villains are those credit card debts, of course. Depending on who you read, the average American owes between $9,000 and $14,000 in personal debt. Wow.

Do you want to experience financial independence? Then decide now to change your attitude toward debt. Despise it like the enemy it is. Determine to eliminate it. Learn how to live debt free. It will revolutionize your life.

Before leaving this point I need to point out another kind of debt. You may not consider it a debt at all, but its affect is the same so I choose to identify it this way. This is the ongoing debt of any kind of regular obligation. It is important to look at every commitment you have of this kind and take every possible step to eliminate or reduce every one.
These obligations include everything from your electric bill to your health insurance, from your cell phone to your house rent or purchase. Your goal should be to make sure you are getting your money’s worth, but more important to reduce the total amount of these obligations as much as possible.
Your sense of freedom financially will be in proportion to the amount of money you have left over each month after meeting all your commitments, including savings.

4th Key to Financial Freedom:
Manage Resources

The next secret to financial independence is to effectively manage resources with financial freedom in mind. When we feel constrained by our financial situation it is not just because we do not have enough money or because there are too many obligations. It is also because we feel like we are out of control, that our need for money is keeping us from enjoying life as we would like.
When it comes to getting in control of our money the best approach is first to follow the steps outlined in the Take Control! section of this site, and then start managing our personal lives as we would that of any important business, utilizing the basic management skills outlined in the law of management articles.

I will simply emphasize here that learning how to keep track of income, expenses, resources, and obligations is the beginning, making sure that your money is being used where it should be is the middle, and evaluating results, making decisions about the future, and guiding your financial situation toward your own goals is the end.

When you know you are effectively moving in the direction of your goals you will feel good about yourself and your money. This is one place where your Net Worth statement, prepared on a monthly basis can be a real plus.
Note:
When you see your list of assets growing every month and your list of obligations vanishing before your own eyes while your net worth just keeps growing, the effect on your sense of freedom and control is really dynamic.
It takes only a few minutes when your paperwork is in good order, but when you see your list of assets (home, bank accounts, savings, and investments) growing every month and your list of obligations (home loan, car loans, and credits card debts) vanishing before your own eyes while your net worth just keeps growing, the effect on your sense of freedom and control is really dynamic.
At this point we can introduce the key element you may have been looking for, the money to live on when you quit holding down a paying job! It isn't Social Security! It is your financial freedom (or retirement) account.
If you are following these key steps you will find it easy to set aside say $200 a month in an investment like a Roth IRA. This, over 40 years, should give you much more than a million dollars. Even a low wage earner can do this when their priorities and management practices are right.
If you start late, adjustments are obviously necessary. Elsewhere I discuss passive income methods and some of us who start late have to find them: rental income, certain kinds of online income, getting paid for your “hobby.” Remember, it doesn’t take much if you follow all we have outlined in the previous steps.

5th Key to Financial Freedom:
Freedom Attitude

The final key is claiming financial independence or freedom as a personal emotional and mental attitude. The previous steps are not particularly chronological in nature, but it is unlikely that you will ever feel financially independent before making substantial progress on the previous ones. Still, a person does not have to become especially wealthy to begin experiencing a feeling of financial independence.
The mistake most people make is associating financial independence with great wealth. The fact is that you could have millions and be totally enslaved by your financial responsibilities.
Many wealthy people are constantly in fear of becoming destitute. This is partly because of the way they invest and manage their money. But it is primarily because of the way they think and feel about themselves and their money.
On the other hand a person can have no income but social security and have only modest savings but feel a great sense of independence, especially when they own their own home debt free and have no other debts of any kind.

If you have all the money you need to meet all of your necessary expenses, if you know how and remain firmly committed to avoiding any other unwanted financial obligations, and if you have more than enough funds to do the things you really value in life, why shouldn’t you feel a sense of freedom financially speaking no matter the absolute level of your resources?

You can and there is no reason not to do so.
Because of its unusual importance, the secrets to applying this final and dynamic principle will be explored more completely in part two of our discussion of financial freedom.

We need to take a more in depth look at the one key element that is least understood. That element is the mental and emotional attitude toward money that is essential if we want to achieve a sense of freedom, financially speaking. The failure to understand this attitude probably explains why so few people ever experience real freedom in the financial realm.
Let me remind you first, however, of the obvious. Financial independence is not just a matter of attitude. In fact we have observed in our preceding article that there are four key skills/practices that must form the foundation for any sense of freedom in our financial lives.
In my office I have a very nice leather recliner. It is really comfortable, and I must say it looks good, too. But the chair wouldn’t sit right at all if any of the four legs failed. Those four feet are small compared to the main part of the chair but they are absolutely essential to support everything above, including me when I am sitting on them.

Four Undergirding Foundations
of Financial Freedom

  • set correct priorities
  • exercise self-discipline
  • live debt free
  • effectively manage resources
Financial independence is a lot like that. The way we think and feel about our money, about the adequacy or inadequacy of the money we have to meet our needs, about the dependability of our income, and about the extent of our financial obligations, is paramount.
But at the same time, much of our ability to develop a positive viewpoint in these areas depends on how well we master those four skills/practices we discussed in some detail in Guide to Financial Freedom (I). They give us a foundation upon which to build.
If necessary go back to the first article on financial freedom for a discussion of these four priorities to be sure you understand how they effect your capacity for money independence.
Obviously these are challenging undertakings but they are not too hard for any of us to master if we really have a sincere desire to achieve our goal of financial independence.
After establishing these four footings to build on, here is the mortar that joins them all together, the fifth and arguably most critical foundation of financial freedom. To stay with our image, it is like the chair seat we sit on supported by the four legs beneath. It consists of the thought habit that leads to actually experiencing financial freedom.

The True Basis of Financial FreedomFinancial independence is not a product of having a certain level of income, nor is it the consequence of having a certain amount of wealth. It is an internal emotion more than an objective reality, generated by an inner attitude rather than outward circumstances. It is the consequence of a chosen money mindset.

This is one attitude that cannot develop without real progress being made toward changing our physical or material circumstances. The four steps we previously outlined identify clearly the nature of those changes. But that having been said, financial freedom requires adopting a pre-requisite attitude about our financial circumstances.
Attitudes are habits of thought. Most people develop attitudes that keep them enslaved to financial obligations. In order to experience financial independence later we must first change our thinking about money now in specific ways.
If we think debt is OK or if we think we don’t need to be saving money there is a weakness in our thinking that practically prevents us from ever experiencing financial independence. It doesn't matter what excuses we come up with, they are all the product of defeatist attitudes.
Note:
The first mental step toward financial freedom is to firmly commitment to becoming financially independent.
The first mental step toward financial freeedom, then, is to firmly commitment to becoming financially independent. That means making a firm decision to develop the four skills/practices we have identified. Then we must adopt and reinforce positive attitudes toward achieving money freedom.
We must begin doing the necessary work involved and keep working on them until they are reality. These three steps are all necessary:
  • Firmly commit to becoming financially independent.
  • Adopt essential goals and attitudes toward achieving these goals.
  • Keep working on these goals and attitudes until they are achieved.
Not every process or experience in life is simple or easy. This is one of the more complex and challenging, that is why so few people ever achieve it. But I believe it is achievable for anyone who takes time to understand it and commits themselves to the goal, at least if they start soon enough. Obviously it gets much harder with age.
Your sense of money independence does not come automatically.Financial freedom is a way of thinking about your money that even if you are wealthy you must choose to adopt. It is also important tobegin feeling this sense of freedom early on in order to build enthusiasm and motivation to keep moving toward its full achievement.
But since this can only be achieved as financial circumstances improve, this means that at first it is best to focus on changing your attitude toward building the foundations for financial independence, that is the four skills/practices we have identified. As progress is made on that front begin focusing on the relationship of those experiences toward your goal of financial independence.
One of the key foundations for financial independence is eliminating debt. An explanation of how this process works may help us see that it is, indeed, a workable undertaking.
Note:
Becoming debt free will take no more than 5-7 years for almost anyone.
John Cummuta (Transforming Debt into Wealth) has shown how an effective program for becoming debt free will take no more than 5-7 years for almost anyone because all the lenders use formulas that fluctuate according to income to limit people from getting more than about that far into debt.
Even if you are not reaching your limits you may still have debt that will take several years to eliminate, of course. But it is very unlikely that it would need to take longer. To protect themselves, lenders just don’t loan people more than so much (although from the stress people experience with their debt, it is obviously too much anyway).
To become debt free you want to focus your attitude changes to move you in this direction. As your debt decreases you will feel a lot of joy in this achievement. You will also feel a real decrease in the feeling of being controlled by debt. At this point you will want to transfer this feeling to an association with your goal of financial independence.
In this way your sense or feeling of money freedom will be a growing experience. Every time you eliminate another obligation you will feel more freedom, as long as you have adopted the attitudes (thoughts habits) that assure you will not adopt a new debt to replace it.
Every time you add to your Roth IRA (or other retirement fund) you will feel a little better prepared to live without your paycheck. And so it goes with all of the related skills which reduce your mandatory expenses or increase permanent income.

Objective Basis for Financial Freedom

We have seen that some people with enormous fortunes are completely absent any sense of financial independence. At the same time others with far less wealth feel completely free from any sense of confinement.
Assuming you have achieved a reasonable degree of success in the skills/practices identified above, the key for being able to experience this sense of freedom is in discovering an objective basis for measuring it.

Reducing Living Expenses

One of the objective steps to financial freedom you need to determine is the amount of money required to meet your basic living expenses. Over time you can reduce your financial requirements, largely by reducing obligations. For many, perhaps most, getting rid of credit card obligations is a game changer.
Personally, I can look back at a time when my wife and I both drove new cars, fully financed. One time we each bought and financed new cars only about two weeks apart. It pains me to remember although I thought it quite normal then!
Obviously we need less money monthly for essentials now that we no longer even consider borrowing money to buy a car compared to what we would if we still thought the way we did then.
Note:The bottom line is, the less money you require to live the less income you will need to feel financially independent.
For those who achieve it, the first month there is no longer a house payment will be the most dramatic cost of living reduction they will ever experience. There are many other ways to reduce your monthly obligations we discuss elsewhere. The bottom line is, the less money you require to live the less income you will need to feel financially independent.

Increasing Passive Income

The second objective measurement of financial freedom potential to look at is retirement income. Unfortunately, for many people the only income they can anticipate in their latter years is Social Security.
If you are intellectually engaged with your financial future enough to be reading this I assume you know how far you can depend on that to pay your way! But it is worth a little.
Note:
For most of us a Roth IRA is likely the most useful vehicle for financial independence or retirement savings.
For most of us a Roth IRA is the most useful vehicle for retirement or financial independence savings. Money market savings accounts and bank certificate of deposits offer less earnings, but those getting older and needing very safe investments have easy access to steady incomes from options such as these. You may have real estate or other income sources.
The choices are endless. The idea here is to set out your own passive income program and develop it until you have fully enough to support yourself with or without regular employment.

Claim Freedom—a Mental Challenge

Believe it or not, the most challenging step in becoming financially independent may be the mental one of actually claiming it for yourself once circumstances permit it. All that we have discussed until now is primarily preliminary to this step, making a fundamental change in our thinking.
Unless you claim it, unless you can choose to say and believe that you need no longer worry about money or feel constrained from living the life you want because of financial considerations, you may have a mountain of money but still be its slave. Once you are able to make the mental commitment to declare your independence, however, you may find an incredible freedom to enjoy your life in a way never before imagined, even in your dreams.
Here is an important concept to consider at this point. Many money people promote the irrational idea that financial independence means being able to do anything you want, any time you want, without regard for the cost. There are many high flyers in the world, but clearly many of them are slaves to their life styles and many of them have no sense of happiness and freedom.
Note:
Financial independence means being able to live in the way that truly brings us the most pleasure. How much money that requires will be different for each of us.
Ask yourself what really makes you happy. The truth is that most of what brings us joy takes no money at all. Associating financial independence with a lifestyle unrelated to our own priorities and interests is irrational.
Financial independence primarily means being able to live the life we choose, free from obligations we cannot easily meet with or without what we normally call our “job”. It means being able to live in the way that truly brings us the most pleasure. How much money that requires will be different for each of us.
Don’t associate money independence with unrestrained spending. That is the surest way to picture financial independence in a way that is really impossible for anyone to experience.

Financial Freedom—Sooner, Not Later

Now for some really exciting news. You don’t have to wait until you reach some hypothetical retirement age to experience the benefits of financial independence.
You have already seen that you can recognize and acknowledge a significant part of that freedom as you accomplish each part of your financial plan such as getting rid of credit card obligations, paying off personal loans, eliminating the mortgage, and establishing a consistent savings habit. Each of these can increase our experience of freedom, financially.
Once you reduce your obligations and increase your automatic income to matching levels, you can declare your freedom completely. You can do it at any age and at any level (within reason) of income. And you do not have to give up your “job” to do it, unless you want to do so.

Find a Job You Love

One potential for early success, at least partially, is to find a career that is personally satisfying and secure. Many jobs are uncertain. It is hard to feel at ease about your money if you are worried about down sizing at your company.
Back when I was in college I met a Fuller Brush salesman who expressed great joy in his work. He told me that not only did he love sales, he knew he could always make a living at it. A good salesman is always in demand and income is unlimited. He enjoyed going to work every day as he made every sales call like a visit with an old friend.
Another opportunity today is nursing. The nursing shortage is not only great, it is certain to remain so for decades.
Note:
When you love your work, and would enjoy doing it even if you did not have to, you experience what might be described as partial financial freedom. It is not your ultimate goal, but is worth a lot if you can do it.
These jobs may not be of interest to you, but there are many jobs in any field that can offer better security than others and if you learn your trade well your quality will always make you marketable.
When you love your work, and would enjoy doing it even if you did not have to, you experience what might be described as partial financial freedom. It is not your ultimate goal, but is worth a lot if you can do it.
Personally I would rather work longer at a job I like than to reach my ultimate financial freedom goals at a younger age working at a job I dislike. In any case, if you enjoy your work you will enjoy working on your financial objectives a lot more.

Income Level is Not the Key

CNBC has hosted a television show called The Millionaire Inside. I watched an episode in which one panelist observed how important it was to find a job you love. There was an amazing chorus of reinforcement from others on the panel.
The theme was that there were plenty of millionaires who worked as janitors or other common jobs and plenty of lawyers and other professionals who were broke. No matter what you really love, you can make a living doing it. If you determine to do it.
It is not what you do or how much you make, but how you manage your money that makes all the difference. So don’t be nearly as concerned about how much you make as in whether you can enjoy what you do.
The key thought for us here, however, is that you are largely freed from feeling that you are a slave to financial constraints even while you do work at a regular job if you are working at something you would do even if you did not have to do so for the money—as long as you have more than enough money to meet your obligations. The money is just a bonus.
Many financially independent people demonstrate this truth every day. Do you think Oprah really has to work? Or Bill Gates (he essentially works for free now with his foundation though officially retired)? Or Warren Buffet?
Note:
Make it your goal to eventually reduce expenses and increase income outside your work so that you could stop working whenever you want.
Nevertheless, you will want to make it your goal to eventually reduce expenses and increase income outside your work so that you could stop working whenever you want or should health problems intervene.
Even though you can feel almost complete freedom while working at a job you love, if a job is necessary at the time in order to meet expenses complete freedom comes at the point when it is not required.

Conclusion

In summary, remember the principle. Financial freedom, or financial independence, is not generated by temporary levels of wealth or income but by setting correct priorities, exercising self-discipline in financial decisions, living debt free, effectively managing resources, and claiming it as a personal emotional and mental attitude.
Begin by firmly committing to your financial freedom plan as one of your top priorities in life and leave no room to deviate from daily work toward money independence.
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